This invention relates to methods and apparatus for restructuring one or more debt obligations issued in the form of interest-bearing bonds, whether in registered form or in bearer form, whether trading at par or above or below par, whether or not the issue has a sinking fund, and whether the issue has a scheduled maturity date or is perpetual, into a serial issue of zero coupon bonds which provides a series of cash payments that is commensurate, on both a discounted basis and on a nondiscounted basis, with the scheduled cash payments of the interest-bearing bond(s). The issuer's obligation to pay interest and obligation to repay principal are referred to collectively as the issuer's "debt payment obligations."
Generally, corporations, municipalities, government agencies, investment trusts, and governments at all levels of sovereignty and jurisdiction issue debt obligations in the form of interest-bearing bonds that have a stated principal amount, maturity date, and schedule of interest payments and principal repayments. Interest is paid at regular intervals to the bondholder, generally semi-annually or annually, based on the principal amount of the bond and the stated interest payment rate. The bond's interest payment rate is also known as the coupon rate of interest. Bonds issued in bearer form have coupons attached to the bond certificate, which are physically detachable. On or after an interest payment date, the bondholder detaches the particular coupon and presents it to the paying agent for payment. A bondholder who chooses to do so can detach coupons from a bearer certificate and sell them separately. In contrast, a bond issued in registered form does not have detachable coupons, but is registered in the name of the owner, who receives regular payments of interest from the issuer or his agent.
The principal amount of the bond is repaid to the bondholder on one or more dates that are specified at the time of issue with the final installment payable on the bond's maturity date, which is commonly between one and forty years after the issue date of the bond.
Often, when a borrower issues a bond it retains the option to call the bond for redemption before its scheduled maturity date. This option allows the borrower to terminate its continuing obligation to pay interest at the stated rate if market interest rates drop significantly below the stated interest rate after the call option becomes effective. The dates and prices at which a bond can be called are established when the bond is issued, and published in a schedule of call prices. This call option gives the issuer flexibility in managing and refinancing its outstanding debt.
The yield at which investors are willing to invest money varies over time depending on existing economic conditions and also on conditions forecasted for the future. The yield also varies depending on the length of time for which the investor commits his money, with longer term debt generally bearing higher yields than short term debt.
The conventional method of calculating a bond's yield to maturity, assuming that the coupons are refinanced by the issuer (reinvested by the bondholder) at the same yield, equates the present value of the future stream of debt service payments to the price of the bond. Each future payment is discounted at the same discount rate, rather than in accordance with the particular discount rate, or yield, at which each respective payment would be valued if sold separately to investors. The schedule of yields at which a sequence of separate debt payment obligations would be valued is called the "yield curve" for the issuer's debt. When a borrower calls all or part of a bond issue for redemption, it repurchases all future debt payment obligations associated with the specific bonds called, thus cancelling all remaining coupon interest payments, near term and long term for those bonds. It pays an optional redemption price that corresponds to an optional redemption yield to maturity. Often, this yield is above the prevailing yield curve for near term payments but below the yield curve for long dated payments. The borrower, however, has no ability to call the short term payments and leave the long term payments outstanding. This limits the borrower's flexibility in refinancing its debt to take advantage of changes in market interest rates.
Recently, methods have come into existence to adjust the structure of non-callable interest-bearing bonds to the economic reality of interest yield curves. Referred to as "bond stripping," the method involves either (i) physically detaching the coupons from existing bearer bonds, or (ii) issuing receipts that evidence separate debt payment obligations and marketing the coupons and the remaining corpus, or principal repayment of the bond, or receipts evidencing these, separately. Bond stripping creates a series of zero coupon bonds with each bond corresponding to a separate debt payment obligation of the stripped coupon-bearing bond. This allows short term and long term coupons to be priced at the different yields that correspond to the yield curve for the issuer's debt. Thus the package of debt payment obligations embodied in an interest-bearing bond, which are all valued at the issue's yield to maturity, can be separated and priced individually according to the yield curve and their respective payment dates. These payment obligations are sold in the market to a number of investors who wish to invest money for different lengths of time and who are willing to pay the prices that correspond to the yield curve. By repackaging the stream of debt payment obligations so as to tailor it to the needs of different investors, economic value is created, which accrues to the agent who strips a bond in the form of a differential between the aggregate sale price of the package of separate debt payment obligations and the price of the interest-bearing bond from which the package of separate debt payment obligations was obtained.
To date, however, bond stripping has been limited to U.S. Government bonds because these bonds are non-callable for long periods and are backed by the U.S. Treasury. Callable Treasury bonds have been stripped but the coupons associated with dates beyond the date the Treasury bond first becomes callable have been left attached to the corpus. Corporate, municipal and agency bonds are not stripped because they are callable and subject to default risk. If a callable bond were stripped and then called, the holders of the stripped coupons or interest payment receipts bearing maturity dates later than the call date would lose their investment, and the holder of the corpus of the bond would enjoy a windfall. Such a result is clearly unacceptable and militates against stripping such bonds. In addition, a coupon holder's rights in bankruptcy or default are ill-defined, and this also creates an impediment to coupon stripping of bonds with call risk or default risk.
It is an object of the present invention to provide a method and apparatus for restructuring existing debt obligations to a form which allows the benefits of coupon stripping to be realized, in which the coupon payment obligations and principal repayment obligation(s) can be bought and sold at prices which reflect the respective yields appropriate to their individual maturity dates, and in which the coupon payment obligations associated with dates during the period of callability can also effectively be stripped from the corpus.
It is a more particular object of this invention to provide a method and apparatus for structuring a serial issue of zero coupon bonds to replace one or more existing interest-bearing bonds, either by physically exchanging a newly issued series of zero coupon bonds for the outstanding bonds or by placing the outstanding bonds in trust and issuing a series of zero coupon receipts against the income flow from the trust in a manner that: (a) leaves the issuer's debt payment obligations unchanged, or nearly unchanged, (i) on both a discounted basis and on a nondiscounted basis, and (ii) on a pre-tax basis and on an after-tax basis; and (b) permits the issuer of the new debt payment obligations to call each debt payment obligation separately at the same optional redemption yield to maturity at which the coupon-bearing bond was callable as of the beginning of the applicable call period.
It is a further object of this invention to provide a system for evaluating the newly created serial issue of zero coupon bonds with respect to currently prevailing interest rates in order to assist the issuer in deciding whether it is advantageous to call any of the zero coupon bonds for redemption and, if so, which ones to call.